Minimise your tax bill with 10 tax saving tips

Published by Gary Adams on 17 January 2017.
Last updated on 17 January 2017

With many expecting inflation to rise this year, it wouldn’t be a bad idea to think about how you can make your money go further at the final hurdle – the taxman.

Check out these 10 tax saving tips below, courtesy of financial provider Hargreaves Lansdown.

And remember, if you’re self-employed, you’ve only got until the end of January to submit your self-assessment tax return

1. Forget the wedding band – tax bands are where it’s at

This tax year, your personal allowance – which is the amount of income you can earn before you have to pay tax – is set at £11,000. From April 2017, this will go up by another £500.
But if you’ve exchanged vows with a loved one , the ‘Marriage Allowance’ lets you transfer £1,100 of your personal allowance to your husband, wife or civil partner - if they earn more than you.

This reduces their tax by up to £220 in the tax year (6 April to 5 April the next year).

To benefit as a couple, you (as the lower earner) must have an income of £11,000 or less.
If you were eligible for Marriage Allowance in the 2015 to 2016 tax year, you can backdate your claim to 6 April 2015 and reduce the tax paid by up to £432.

Just apply via Gov.uk.

 

2. Make sure you’re aware of the new personal savings allowance

The first £1,000 of your savings income is tax free if you’re a basic rate taxpayer. This includes any interest accrued from corporate bond funds and peer-to-peer (P2P) loans. So ensure that you make use of this.

Higher rate tax payers get £500 worth of savings interest tax-free, although additional rate tax-payers don’t get anything.

 

3. Divvy up your dividends

The first £5,000 of taxable dividend income is free – this means that if there are two of you, you can enjoy £10,000 per year without having to pay tax. Above this, you’ll be looking at 7.5%, 32.5% and 38.1% depending on your taxpayer rate. Transfer dividend-paying assets to a partner as a gift if necessary.

4. Your Isa is nicer

Just like cornflakes, sometimes the original is best. This tax year you can put £15,240 into an Isa (individual savings account). From April, this goes up to £20,000 – all tax-free.

An Isa should always be your first stop when deciding what to do with cash and stocks and shares investments.

 

5. Use your pension allowance

Not only is a pension still an enormously tax-efficient way to save for your future, but changes to the higher rate tax breaks may well be on the cards some time in the future.
Currently, you get tax relief on pension contributions of up to 100% of your earnings or up to £40,000 worth of contributions per year – whichever is lower.

For more information, make sure to read: Personal pensions: a guide.

6. Ensure your spouse has a pension, too

If you’ve a loved one, even if they don’t earn, they should have a pension too. The reason for this is that the government will sling up to £720 their way in the form of tax relief on the first £2,880 contribution they make per year.

7. Capital gains have an allowance too

This tax year, you can earn up to £11,100 in capital gains without paying the Capital Gains Tax (CGT) on it.

You can also think about executing a ‘Bed & Isa’ (or ‘Bed & SIPP’). This is a process where you sell your shares or funds and then buy them back, but inside inside an Isa or SIPP. In doing this, any gains you make will be protected within the wrapper.

 

8. It’s better to make gains than income

Whereas the top rate of income tax is 45%, the top rate of CGT is 20%, with, as stated earlier, an allowance of £11,100.

It’s also worth bearing in mind the £5,000 tax free dividend allowance as covered in point 3.
So ensure income-producing assets are in a tax wrapper and growth assets are without.

9. Remember the new main residence nil rate band

From April, the current nil-rate inheritance tax (IHT) band will rise from £325,000 to £425,000. It will then increase each year by a further £25,000 until the tax year 2020/21 when it will reach £175,000 extra. From then, it will increase with the rate of inflation.

In theory, this means a couple could pass on £1,000,000 free of inheritance tax.

To make the most of this allowance, however, ownership of the residence must be in joint names.

 

10. Like a bit of risk? You could be set for 30% income tax relief

By dipping your toe into the world of venture capital trusts (VCTs) – where you invest in start-up or smaller company – you could put in at least £10,000 at a cost of £7,000 due to the 30% tax relief offered VCT investors. However, to get this tax relief you must hold these shares for at least five years.

A further advantage is that any dividends from ordinary shares in VCTs aren’t liable for income tax.

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